S&P Global: Business lays down its green roots

Investors are diversifying portfolios away from perceived climate risk and carbon-intensive projects. Green bond issuance nearly doubled in 2016, reaching US$95.6 billion1. Policymakers are encouraging and, in France, mandating climate reporting. Governments and municipalities alike are establishing carbon-reduction goals; this may be met by business with more green transport, green building and renewable energy projects. Corporates are becoming increasingly interested in green finance.

Businesses are increasingly contending with the consequences of extreme climate-related weather events. Recent hurricanes Irma, Harvey, and Maria in North America, and the wildfires winding through Portugal and Spain, are cases-in-point. On top of these episodic events, gradual changes as a result of greenhouse gases are in motion. And these affect land-use, sea-levels, employment, and—ultimately—economic activity. Corporates are thus becoming increasingly concerned about managing environmental exposure.

Drivers of change

The 2015 Paris Agreement, with the ultimate goal of reducing global warming to an increase below 2°C, has been ratified by nearly 90% of UNFCCC (United Nations Framework Convention on Climate Change) members— all 195 of which are signatories of the agreement. The Paris Agreement is driving global engagement with climate change. In order to succeed in meeting the 2°C target, each signatory state must ensure its national climate change policies represent their maximum potential.

Moreover, the 2°C target has created the need for US$800 billion to be invested every year to 2020 in renewable energy, energy efficiency, and low-emission vehicles alone, according to OECD estimates. To put that in perspective, global investment in similar investments in 2016 was quantified at US$300 billion. In short, while the green finance marketplace is experiencing significant growth, it still has a way—or US$500 billion per annum—to go to meet OECD estimates.

The rise of green bonds

This reality has spurred major economies to begin funding significant investments in climate-friendly energy and infrastructure. Green bonds—which require disclosure of use of proceeds by the issuer—are one popular financial instruments being used to invest. Notably, China—the world’s single largest carbon emitter, which issued a negligible amount of green bonds in 2015—became 2017’s joint leading green bond issuer (alongside France and the US). According to the Climate Bonds Initiative (CBI), Chinese issuances total US$15.2 billion this year to date. This issuance is part of China’s ambitious five-year plan from 2016-2020, which is aiming for considerable greenhouse gas emission reductions.

Moreover, growth has also accelerated among corporates globally—the Confederation of British Industry (CBI) has identified US$32.6 billion issued so far this year—and European energy companies have been leading the way. The four largest corporate issuers to date (Iberdrola, TenneT Holdings, EDF, and Energie) account for US$21.5 billion of green bonds between them. All of this capital (or all of these funds) is dedicated to renewable energy projects and, as such, is contributing to decarbonisation.

Rolling out renewables

The energy sector is the greatest emitter of harmful greenhouse gases—more than both transport and buildings respectively—according to the Intergovernmental Panel on Climate Change (IPCC). So, financing renewable energy generation in the form of wind, solar, or hydro power would contribute to decarbonisation. And, while green bonds for renewable energy projects are thriving, other green financing tools should not be overlooked.

Indeed, of the US$895 billion climate-aligned bonds identified by the CBI, just US$221 billion are labelled “green” by the issuer. Although labelled green bonds declare environmental intent upfront, climate change mitigation doesn’t stop at the green label. An additional US$674 billion of climate finance—comprised of a variety of green capital resources—is also contributing to the transition to a sustainable economy. Of that total, US$173 billion is dedicated to financing renewable energy generation, including the industry’s technological development.

A sustainable future

At the heart of any good financial market is transparency. Comprehensive and consistent environmental disclosure will assist in ensuring the integrity of green finance—and facilitating its increasingly widespread use. This disclosure entails both the use of proceeds for green bonds and the climate-related risks and opportunities faced by companies both financial and non-financial.

This has prompted policy bodies to draw up voluntary guidelines to help ensure accurate, standardised, and comparable disclosure. Both the International Capital Market Association’s (ICMA) Green Bond Principles2 and the Task Force on Climate-related Financial Disclosure’s (TCFD) new recommendations3, aim to provide the necessary facilitating frameworks for green bond issuers and companies respectively.

Ultimately, by allocating capital to climate change mitigation projects such as green buildings, green transport and, of course, renewable energy generation, the financial industry is contributing to a low-carbon economy and a greener, more sustainable future.